Chapter 12. Building a New Economy: Shifting Subsidies

Each year the world’s taxpayers provide an estimated $700 billion of subsidies for environmentally destructive activities, such as fossil fuel burning, overpumping aquifers, clearcutting forests, and overfishing. An Earth Council study, Subsidizing Unsustainable Development, observes that “there is something unbelievable about the world spending hundreds of billions of dollars annually to subsidize its own destruction.” 22

Iran provides a classic example of extreme subsidies when it prices oil for internal use at one tenth the world price, strongly encouraging car ownership and gas consumption. The World Bank reports that if this $3.6-billion annual subsidy were phased out, it would reduce Iran’s carbon emissions by a staggering 49 percent. It would also strengthen the economy by freeing up public revenues for investment in the country’s economic development. Iran is not alone. The Bank reports that removing energy subsidies would reduce carbon emissions in Venezuela by 26 percent, in Russia by 17 percent, in India by 14 percent, and in Indonesia by 11 percent. 23

Some countries are eliminating or reducing these climate-disrupting subsidies. Belgium, France, and Japan have phased out all subsidies for coal. Germany reduced its coal subsidy from $5.4 billion in 1989 to $2.8 billion in 2002, meanwhile lowering its coal use by 46 percent. It plans to phase out this support entirely by 2010. China cut its coal subsidy from $750 million in 1993 to $240 million in 1995. More recently, it has imposed a tax on high-sulfur coals. 24

A study by the U.K. Green Party, “Aviation’s Economic Downside,” describes the extent of subsidies currently given to the U.K. airline industry. The giveaway begins with $17 billion in tax breaks, including a total exemption from the federal tax. External or indirect costs that are not paid, such as treating illness from breathing the air polluted by planes, the costs of climate change, and so forth, adds nearly $7 billion to the tab. The subsidy in the United Kingdom totals $391 per resident. This is also an inherently regressive tax policy simply because a substantial share of the U.K. population cannot afford to fly very often if at all, yet they help subsidize this high-cost mode of transportation for their more affluent compatriots. 25

While some leading industrial countries have been reducing subsidies to fossil fuels—notably coal, the most climate disrupting of all fuels—the United States has been increasing its support for the fossil fuel and nuclear industries. A Green Scissors report from 2002, a study supported by a coalition of environmental groups, calculated that over the past 10 years subsidies for the energy industry totaled $33 billion. Of that, the oil and gas industry got $26 billion, coal $3 billion, and nuclear $4 billion. At a time when there is a need to conserve oil resources, U.S. taxpayers are subsidizing their depletion. 26

The environmental tax shifting just described reduces taxes on wages and encourages investment in such activities as wind electric generation and recycling, thus simultaneously boosting employment and lessening environmental destruction. Eliminating environmentally destructive subsidies reduces both the burden on taxpayers and the destructive activities themselves.

Subsidies are not inherently bad. Many technologies and industries were born of government subsidies. Jet aircraft developed with military R&D expenditures led to modern commercial airliners. The Internet was the result of publicly funded links among computers in government laboratories and research institutes. And the combination of the federal tax deduction and a robust state tax deduction in California gave birth to the modern wind power industry. 27

But just as there is a need for tax shifting, there is also a need for subsidy shifting. A world facing the prospect of economically disruptive climate change, for example, can no longer justify subsidies to expand the burning of coal and oil. Shifting these subsidies to the development of climate-benign energy sources such as wind, solar, biomass, and geothermal power is the key to stabilizing the earth’s climate. Shifting subsidies from road construction to rail construction could increase mobility in many situations while reducing carbon emissions.

In a troubled world economy facing fiscal deficits at all levels of government, exploiting these tax and subsidy shifts with their double and triple dividends can help balance the books and save the economy’s environmental support systems. Tax and subsidy shifting promise both gains in economic efficiency and reductions in environmental destruction, a win-win situation.

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